Question

X Homework - Graded ent: Chapter 11 Homework - Graded Assignment Score: 60.00% Save Submit Assignment for Grading Question 8 of 10 Check My Work eBook Problem Walk-Through n is considering two mutually exclusive projects, X and Y, with the following cash flows: 0 1 2 3 4 Project X -$1,000 $110 $320 $370 $750 Project Y $1,000 $1,100 $110 $55 $55 The projects are equally risky, and their WACC is 11%. What is the MIRR of the project that maximizes shareholder value? Do not round intermediate calculations. Round your answer to two decimal places. Check My Work 0 Icon Rey AssignmentMain.do?take Assign... Question 8 of 10 6:08 PM "* 11/20/2019

Answer 1

To determine which project is better, we need to find their NPV.

NPV = PV of Cash Inflows - PV of Cash Outflows

NPV(Project X) = [$110 / (1 + 0.11)] + [$320 / (1 + 0.11)²] + [$370 / (1 + 0.11)³] + [$750 / (1 + 0.11)⁴] - $1,000

= $99.10 + $259.72 + $270.54 + $494.04 - $1,000 = $123.41

NPV(Project Y) = [$1,100 / (1 + 0.11)] + [$110 / (1 + 0.11)²] + [$55 / (1 + 0.11)³] + [$55 / (1 + 0.11)⁴] - $1,000

= $990.99 + $89.28 + $40.22 + $36.23 - $1,000 = $156.72

As the project with the higher NPV should be accepted. Project Y has the higher NPV of $156.72 and should be accepted. Reject Project X.

Project Y's MIRR = [FV of Cash Inflows / PV of Cash Outflows]^1/n - 1

= [{{$1,100 * (1 + 0.11)^{(4 - 1)}} + {$110 * (1 + 0.11)^{(4 - 2)}} + {$55 * (1 + 0.11)^{(4 - 3)}} + {$55 * (1 + 0.11)^{(4 - 4)}}} / $1,000]^1/4 - 1

= [{$1,504.39 + $135.53 + $61.05 + $55} / $1,000]^1/4 - 1

= [$1,755.98 / $1,000]^1/4 - 1

= [1.7560]^1/4 - 1 = 1.1511 - 1 = 0.1511, or 15.11%